Buying a home can be a roller coaster ride with many ups and downs along the way, especially in today’s hot housing market. From finding the home of your dreams to being outbid by another buyer, there are many potential emotions involved in the process. However, the one part that should be easy and straightforward is applying for and securing your mortgage loan. Here are items you should know before and during this process.
Make a pre-qualification checklist
The first step toward purchasing a home is getting pre-qualified for a mortgage loan. During this phase, you will work with a financial lender to help you navigate the process. For first-time homebuyers – and even those who have been through the process before – knowing what you need to pre-qualify can be challenging. Following are items your lender will ask for during this process:
• Most recent two years of W-2s for anyone whose name will be on the loan
• Two years of tax returns
• Statement of assets, such as 401k accounts, mutual funds, investments and, most importantly, the accounts the funds your down payment is coming from
• The lender’s application filled out as completely as possible
• Homeowners insurance information
After gathering these items and reviewing your financial history, your lender will tell you the loan amount you are approved for. This will help provide budget parameters as you begin house hunting. The pre-approval process also kick-starts your search, as it shows sellers you are serious about purchasing a home.
Loan Application Dos and Don’ts
Once you find the home of your dreams, it’s time to apply for the actual loan. During the application process, your lender will verify all information, including the steps leading up to closing.
But here’s the part that many people forget: once you apply for the loan, there are a few things you should avoid doing until after closing day, including:
Changing Employment: If possible, avoid changing jobs during this time. Your income is a source of repayment on the loan, and if your salary changes or you switch fields, this may have a negative impact on your loan approval. If you do make a move, consult with your banker to determine if it will affect your loan.
Moving Money: It is not unusual to move all the funds you need to close on your home into one account. However, it’s important to let your banker know if you are doing this, so they can verify large deposits and “source” the funds. That means it’s vital to keep a paper trail for your transactions.
Making Large Purchases: Don’t make any large purchases until you close on your loan. This includes furniture for your house, a new car or anything else that will significantly change the debt you have.
Additionally, all credit inquiries must be explained and documented. This means you should avoid applying for a new credit card or any activity where your credit will be pulled. Your credit score is an important part of your loan process; therefore, you should avoid activities that could change it. Also, make sure to continue paying all your bills and credit cards on time.
Delaying Insurance Research: Don’t wait until closing to shop for homeowner’s insurance. Your insurance agent may need to inspect the property before extending coverage, and the process could take a few days. You don’t want this process to delay closing on your new home. Also, make sure your deductible is not more than two percent of your loan amount and that coverage is effective on the closing date for a 12-month period.
Forgetting Your Team: Don’t lose contact with your mortgage lender throughout the process. They can help you avoid making decisions that could negatively affect the outcome of your mortgage loan.
Closing the Deal
After following this important list of dos and don’ts, it’s time to sit down at the closing table. You will need the pre-qualification checklist items as well as:
• Copy of the sales contract
• Statement of sufficient assets for closing, such as a note from your bank or a gift letter for down payment funds you received from family members
• Realtor information
• Title company of choice
Purchasing a house is a meaningful milestone, but one that can be complicated and challenging. By following these steps and working with a trusted financial partner, you can eliminate unnecessary stress and put all your focus on finding and enjoying your new home.
Diane Hughes is executive vice president and director of mortgage lending for UMB Bank.